Could We Learn a Lesson from Wiley?

Remember when Wiley Coyotte would chase  Roadrunner off the edge of a cliff? There was always that awkward passage of time as he sheepishly tip-toed back to the edge only to plunge to the valley below. Recently, I have heard our economy’s current state described using this cartoon from our childhood. Why is it that Wiley never has a parachute?

It is likely that our economy will experience a double dip recession and investment portfolios should recognize this potential. As we enjoy this record recovery in securities prices, one cannot help but think what will happen if the economy slips into recession again. Now is the time to have your strategy in place.

Meredith Whitney, the bank analyst who predicted last year’s collapse of the credit markets was quoted in the financial press today as being more bearish now than at any point in the last year. I agree.

That being said, we’ll enjoy this bear market rally while it lasts; always with an eye for the door though.

“Aint it great” is a phrase I remember hearing as a child. You see, I had family members who were active Amway distributors. I have fond memories of listening in on meetings in which the presenter drew lots of charts and circles, explaining how everyone could “live on Easy Street” if they would embrace the Am Way. I for one never quite understood the charts and circles but it didn’t matter because all of the grown-ups kept saying “Aint it Great!”

Investors I guess feel the same way these days. Can’t figure out why the market keeps rising but …. “Aint in Great!” Frankly, stock fundamentals stink but the charts look terrific. Market technicians, those brainy folks who track market momentum and investor emotion, are creating charts and drawing circles. Many of them see opportunity as cash re-enters the market from the sidelines.

That being said, when the trend reverses, be prepared for a significant market correction. We have a strategy to protect protfolio values. Do you?

Investors who have been “long” this summer have enjoyed an historic recovery of market values. Now it looks like the rally may be losing steam. HFI Wealth Management is watching market action very closely and is prepared to protect client assets when the reality of this economy, the credit crunch and fragile investor emotion whistle for the bear again. Can you hear it? “Here bear bear bear.” Now is the time to prepare.

Do you have a plan? What is your sell discipline?

I know this is driving the analysts crazy. The market pundits are losing their minds. The market shouldn’t keep breaking new highs; not with headlines proclaiming the end of the recession. Or should it? The Dow is up more than 4000 points since its most recent low in March.

The driver is the same as as it always is….investor emotion. While at this time last year the dominant emotion was panic, this time its panic….too! There is a tremendous amount of pressure to be invested right now. As long as the fear of missing the greatest one year run in history mounts, investors will pour money into stocks. Is this wise? Sure it is as long as you know when to lock in gains and get out of the way of the sneaky bear.

Question: Do you have a sell discipline? Is it based on your “gut” or something measurable?

I really hate to continually blog about dishonest financial advisors but it seems that we are surrounded by them. I spent the better part of today meeting with hard working business owners who fell victim to the sinister designs of their longtime tax advisor. What makes a successful, highly regarded and trusted advisor turn to the dark side? It can’t just be about money…. Can it?

With so many crooked advisors being outed, many investors have started wondering who can be trusted to offer prudent advice without the risk that their advisor will steal from them. The easiest way to protect yourself from fraud is to use an advisor who avows his/her fiduciary duty to you and one who never actually takes custody of your assets.

What do you think should become of the likes of Bernard Maddoff?

Another powerful week for the stock market illustrates that there is no arguing momentum. It certainly looks like this rally could continue and perhaps for quite a while. In fact, many market analysts see this trend continuing for a few quarters. It seems clear to this observer that as the market advances in the face of terrible economic news that this rally is likely more about a reassessment of the risk of failure than about economic or business strength. There remains an unprecedented amount of cash on the sidelines and you can almost sense the tension as investors contemplate unwinding their uber conservative strategies in order to climb aboard the rally before it ends.

On the earnings front, expectations have been set so low that it is fairly easy for many stocks to beat the market analyst’s expectations. This will continue to be the case as we move forward for the next several months and keep sentiment improving as a result.

Last week was an amazing week for the stock market. As you can see in the tables below all asset classes ended the week sharply higher with small caps winning the race rising 7.97%.  I have been watching the market, looking for a significant pull-back and now wonder if we have already seen it. (Though the S&P 500 declined by 7% over the last four weeks, it managed to erase those losses in just four days last week.) Despite the fact that economic and political news has created a dark backdrop for the markets, investors are plowing money back in almost without fear. Many would suggest that the greater fear is the fear of missing the rally. Dollars are flowing from cash to stocks.

We are currently in the midst of earnings season. Expectations are so low that even disappointing results are greeted with jubilation. “At least they weren’t as bad as they might have been”. Sentiment is still rising out of a cataclysmic end of the world scenario to something more akin to survival. Even influential bank analyst Meredith Whitney, who last year nailed the demise of our large money center banks raised her rating for Goldman Sachs and even warned against shorting large banks. Things aren’t great but they could be worse. Nouriel Roubini, Dr. Doom had more positive comments on the economy, suggesting that perhaps the worst is behind us.

Even though fundamentals don’t support the continuation of this rally, they almost never do. We are bullish in the intermediate term. We recognize that at some point the reality of huge government spending, higher taxes and muted profit expectations for corporations will come home to roost. Until then, we are glad to own stocks.

The numbers:

Sources: Morningstar (simple averages), Yahoo! Finance, CBS Market Watch. Past performance is no guarantee of future results. Indices unmanaged and cannot be invested in directly. 3 & 5 year returns are annualized and assume that dividends are not reinvested.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from HFI Wealth Management To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.